Planning the Tax Structure
There are effectively no taxes on business in Bermuda, apart from annual fees (depending on capital) of BMD2,000 or more, and no personal taxes either apart from a payroll tax on employees. Therefore businesses can plan to locate part or all of their operations in Bermuda without local taxation worries, although it must be said that Bermuda is an expensive place, so that if significant staff or premises are going to be needed, costs should be checked out carefully in advance.
The normal choice of Bermudian entity will be an 'exempt' company - ie exempt from exchange controls applying to local companies. Until recently, a tax certificate was available guaranteeing that no direct taxes will be levied on such a company until 2016. Following the enactment of the Exempted Undertakings Tax Protection Amendment Act 2011 (the "Amending Act"), such certificates now guarantee no direct taxes until 2035.
Because Bermuda has no corporate taxes, it also has no tax treaties, meaning that dividends or other types of income paid from Bermuda to high-tax countries are going to be taxed in the hands of the recipient, depending on the local regime. Many high-tax countries have 'Controlled Foreign Corporation' legislation, meaning that undistributed profits in a Bermudian (low-tax) subsidiary will be deemed to be taxable income in the high-tax residence country of a controlling owner (individual or company). The exact arrangements vary widely.
It follows that the owner of a business in a high-tax country who wants to transfer part or all of the business to a low-tax area such as Bermuda must follow one of the following routes or some more-or-less complicated variation or combination of them (it must be understood that the right solution will depend completely on the circumstances of age, residence, country etc - these are just illustrative possibilities):
- Set up a new business in Bermuda with ownership which falls outside the CFC rules, eg don't hold more than 40% from high-tax country, and put remainder of shares in trust for children or in the hands of an offshore relative;
- Create a joint venture with other onshore companies or owners whereby ownership is sufficiently distributed to escape CFC rules;
- Owner (individual or company) move offshore (not necessarily Bermuda), move business to Bermuda and outsource high-tax area distribution (if physical);
- Transfer existing business into trust or other offshore ownership for inheritance tax purposes; set up new offshore business to handle expanded range of products or markets.
NB: Any transfer of all or part of a business away from a high-tax area is likely to trigger a disposal for capital gains, gift or transfer tax purposes - great care is needed to avoid this happening. Companies may be in a better situation than individuals to mitigate the effects of tax on a transfer; equally, companies with international subsidiaries may be able to make use of 'mixer' holding companies, and thus may not be so much affected by the CFC rules.
In fact there are numerous possibilities for arriving at an effective structure; it is normally possible to improve the tax performance of a business substantially by moving part or all of it offshore - but expert professional guidance is essential, and the suggestions above are no more than indications of the sort of thing that may be effective in some circumstances.